Problems in the Income Method in Calculating National Income

Problems in the Income Method in Calculating National Income

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The income method to calculate the national income is fraught with the following difficulties:

1. Houses that are Owner-Occupied - A person who rents a house to another person earns rental income; however, if the person occupies the house himself, will the house-owner's services be included in national income? As if the owner were to sell the house to himself as a tenant, its services are included in national income. The estimated amount of imputed rent is the amount that the owner-occupied house could have been rented for for the purposes of the national income accounts. The portion of the total rent that would have been due to the homeowner after deducting all costs is used to calculate the imputed net rent.

2. Self-employed People - Another issue arises regarding self-employed people's income. In their situation, it is extremely difficult to determine the various inputs provided by the owner. He could be contributing capital, labor, land, and business expertise. However, estimating the value of each factor that goes into production cannot be done. As a result, he receives compensation for his factoring services in the form of interest, rent, wages, and profits. National income includes this.

3. Goods for Self-Use - In developing nations like India, farmers keep a lot of the food and other goods they make on the farm for themselves. The question that needs to be answered is whether or not the portion of produce that is not sold in the market can be included in the national income. If the farmer sells all of his produce on the market, he will have to use the money he makes to buy what he needs for himself. Instead, if he keeps some produce for himself, it has value and needs to be included in national income.

4. Wages Paid in Kind - Another issue arises when employees receive free food, lodging, clothing, and other perks in exchange for their labor. Employers' in-kind payments are included in the national income. This is due to the fact that the employees would have received compensation equivalent to the value of free meals, lodging, and other amenities. from the employer and used the same amount to pay for things like lodging and food.